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Investing Prophet Jeremy Grantham Takes Aim at Climate Change

(Bloomberg Businessweek) -- Terrifying an audience is one of Jeremy Grantham’s specialties. The legendary investor, co-founder of Grantham Mayo Van Otterloo (GMO), is famous for predicting doom. And he’s famous for being right, with a remarkable record of spotting investment bubbles before they pop, notably the 2000 tech crash and 2008 financial crisis.

These days, the topic of Grantham’s warnings is not financial markets but the environment. At universities and investor conferences, gardening clubs and local environmental groups, he gives a talk titled “Race of Our Lives”—the one between the Earth’s rapidly warming temperature and the human beings coming up with ways to fight and adapt to climate change.

Green technologies, like batteries and solar and wind power, are improving far faster than many realize, he says. Decarbonizing the economy will be an investing bonanza for those who know it’s coming—“the biggest reshuffling of the economy since the Industrial Revolution.” Despite these gains, people are losing the race: Climate change is also accelerating, with consequences so dire that they’re almost impossible to imagine.

Grantham says he’ll devote 98 percent of his net worth, or about $1 billion, to help humans win the race. Currently he and his wife, Hanne, are giving more than $30 million a year to eight large nonprofits and about 30 smaller ones. Beneficiaries include three academic institutes in the U.K. named after him, at Imperial College London, the London School of Economics, and his alma mater, the University of Sheffield.

While the donations fund a variety of climate research and policy projects, Grantham focuses his presentations on overpopulation. Forget the flooding of oceanfront cities such as Miami or his adopted hometown of Boston. “Agriculture is in fact the real underlying problem produced by climate change,” he says. With topsoil disappearing at a rate of 1 percent a year and “only 30 to 70 good harvest years left depending on your location,” he says, farmers will struggle to feed the planet. Higher sea levels will inundate the world’s great rice-producing river deltas.

“Even without climate change,” he says, “it would be somewhere between hard and impossible to feed 11.2 billion” people, the United Nations’ median population estimate for 2100. Every other animal species on Earth lives with “recurrent waves of famine,” Grantham says, with population rising and falling based on their food supply. Why not us? He brings up a chart showing the tripling of the world’s population since he was born, more than 80 years ago. “If that’s the curve in the stock market,” he says, “you know what to do: panic and go short.” Translation: When something goes up that far for that long, it’s almost certain to plummet. The only question is when. The next bubble, he seems to be implying, is humans. “The presentation is so severe and raw,” says Morningstar Inc. Chief Marketing Officer Rob Pinkerton, who watched almost 1,300 financial advisers take in Grantham’s keynote speech at the Morningstar Investment Conference in Chicago in May. “It really rattled them.”

Grantham’s discussion of overpopulation makes some people uneasy. “Population is a delicate issue,” says Jonathan Foley, a climate scientist who focuses on agriculture and is executive director of Project Drawdown, a group working on responses to climate change. On the one hand, the decision to have children is “one of the most fundamental of human rights,” he says. “Naturally it’s a sensitive topic to bring up, especially coming from the West.” Still, Foley agrees the issue needs to be discussed. “We can’t pretend there are no limits to the planet,” he says. “You need to address the seriousness of this without triggering people to become fatalistic.”

Grantham delights in being provocative, making statements that seem especially outrageous considering the source, a longtime denizen of Wall Street. The investment business is a “vastly overpaid industry,” he tells a roomful of financial advisers. He lambastes economists, the Federal Reserve, and the flaws of capitalism. “On income inequality, I am left of Karl Marx,” he declares. A father of three and grandfather of six, he applauds the falling fertility rate in most of the developed world. “We have discovered at long last that children are both expensive and incredibly inconvenient,” he says. And as for his perceived adversaries—climate skeptics, oil and chemical company executives, and politicians who fail to take climate change seriously—“perhaps they hate their grandchildren.”

Born north of London in 1938, Grantham never met his father, a major in the Royal Engineers who fought in World War II and died in North Africa in 1941. Grantham and his three older sisters were abruptly sent north to Yorkshire to live with their grandparents after a bomb landed, unexploded, dangerously near their home. After graduating from the University of Sheffield, he was frustrated to find Oxford and Cambridge graduates—“the typical, upper-class chinless wonders”—dominating the best jobs in London. Nonetheless, he says, he “talked his way” into a position at the oil company Royal Dutch Shell, then won admission to Harvard Business School.

For a billionaire, he’s comically thrifty. He and Hanne have lived in the same Beacon Hill townhouse since 1974. A rare bit of self-indulgence is his recently arrived Tesla Model 3. Colleagues tell stories of Grantham insisting on flying coach and of helping him carry luggage down into the London Tube because he didn’t want to pay for a car out to the airport. “He’s cheap, and he’s funny about it,” says Peg McGetrick, a longtime friend and a director at GMO. “He really wants to put every dime into this foundation.”

At first, Grantham and his wife were relatively conventional environmentalists. Their philanthropy was inspired by their travel, including a family trip deep into the jungles of Borneo when their children were young. By 2011, though, Grantham was protesting the Keystone XL pipeline outside the White House. His daughter was among dozens of climate change activists taken to jail. Earlier he had been “apolitical,” or, if anything, an “old, late-lamented liberal Republican,” he says. The 2000 U.S. election was a turning point. “Suddenly, politics and climate became mixed up,” he says. “I began to realize that there were major-league deficiencies in capitalism which had not been on my radar screen.” And “I had no idea how deeply the propaganda machine of the right wing went and how well-funded it was, how smart it was, and how far ahead of the curve it was. The left were ignorant in comparison.”

Climate change, politics, and capitalism became frequent topics of Grantham’s quarterly letters. In his view, the U.S. has been pushed into the grip of an unhealthy version of capitalism, one in which corporations put profits way ahead of all other considerations. “The social contract of 1964, when I arrived here, has been totally torn up,” he says. “Anything that happens to a corporation over 25 years out doesn’t exist for them. Therefore, grandchildren have no value.”

While capitalism “does a million things better than any other system,” he says, it fails completely on long-term threats such as climate change. “You must not expect unnecessary good behavior from capitalists,” he says. The answer, he adds, is strong regulations: “I’m sorry, libertarians, it is the only way.”

The election of Donald Trump was, he hopes, the “final flowering of corporatism. It seems that every conceivable advantage that you could give to corporations has been given, and every conceivable advantage has been taken away from the man in the street.” He laments that the Republican administration has led to a “lopsided” tax law, more pressure on unions and workers, and a rollback of environmental regulations. Especially galling is Trump’s withdrawal from the Paris Agreement, a move that he says makes the U.S. a “rogue state.”

While giving away $1 billion, Grantham’s planning to make even more money, and he’s hoping climate change offers the opportunity. In April 2017, GMO, which manages about $70 billion, launched a Climate Change Fund—“after eight years of nagging,” he says. It invests in companies and commodities expected to benefit from decarbonization—clean energy, agriculture, water, energy efficiency, and commodities such as copper that are used heavily in green technology such as batteries. “So quite a lot of stuff that I do is no longer blatantly off-topic,” he says.

Grantham doesn’t directly manage the fund, but he offers advice to the manager and plugs it during speeches and meetings with the large institutional investors that make up most of GMO’s client base. He says he badly wants it to succeed so that other managers will copy its strategies. The fund’s criteria are limited to the climate. Unlike many other socially responsible investments, it doesn’t get into other social, labor, or governance issues. “This is so critical, I’m into triage,” Grantham says. “I’m willing to compromise on every issue” to focus on climate.

Pitching the fund to investors and financial advisers, he champions the idea of selling off fossil fuel stocks. He assures notoriously conservative investment committees that it won’t hurt performance: His analysis of returns over the past 30, 60, and 90 years shows divesting any one sector of the market barely affects overall performance. In the next several decades, he argues,oil stocks represent a huge risk for investors who don’t recognize the threat of climate change. “They’re operating in a biased world,” Grantham says, one with a “systematically biased output of data” and obfuscation on climate change. “In that world, it is not surprising that investors have been slow on the uptake.” Expect investors to recognize their mistake “very slowly, very slowly,” then “all at once,” he says. “The dangers are much greater than you think.”

Grantham is also making climate investments with his own money. About a fifth of his total investment portfolio is “mission-driven”—mostly startups with technologies that could fight climate change. There are investments in companies working on fusion power, an ultra-efficient car, “next-gen” agriculture, and a battery that could be much cheaper, smaller, and lighter than anything on the market. Overall, about half his personal assets are in venture capital and other private investments, an unusually high amount to put in risky, illiquid assets. “We are trying to actually blow away everybody’s return,” he says.

A small, nondescript room in GMO’s main offices on Boston Harbor serves as headquarters for all the Granthams’ philanthropic and investing work. It’s the office of Ramsay Ravenel, the foundation’s executive director and one of two full-time staff members. With Ravenel right down the hall from Grantham’s office, they can be in constant touch. “We can move fast. We answer to nobody,” Grantham says. In one day, for example, they committed to funding a scientist’s last-minute trip to Greenland to study the ice cap before the season changed. The strategy is constantly changing, Grantham said, sitting in Ravenel’s office in May. “On at least a monthly basis, including yesterday, we sit down and say, basically: ‘Wipe your mind clean, what are we trying to do here?’ ”

On climate science, the future of agriculture, and his other obsessions, Grantham risks looking like another billionaire dilettante weighing into topics he doesn’t understand. But he sees his lack of training as a plus. “It’s a wonderful advantage when you come in fresh as a daisy and question everything,” he says, free of not just preconceived ideas but also any career risk that might make him less daring or original. He’s spent years urging scientists to raise more of an alarm about climate change—to trumpet the data suggesting it’s actually accelerating. Grantham turned 80 on Oct. 6. Asked how this milestone shifted his perspective, he pauses. “There’s no quick one-liner on aging,” he says. “We know this is an urgent topic, and I know I don’t have that long to do it.” —With Annie Massa and Eric Roston

To contact the editor responsible for this story: Eric Gelman at egelman3@bloomberg.net